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Expenses Allowed as Deduction only on Actual Payment (Section 43B of the Income Tax Act, 1961)

As per Section 43B of the income tax act, 1961 certain expenditure / payments which are otherwise eligible for deduction under the Act shall be allowed as a deduction only in the year of actual payment irrespective of the year of accrual of such expenditure. The section provides a list of such expenses allowed as deduction only on actual payment under the head ‘Income from business and profession’.

If an assessee fails to make payment of such specified expenses till the end of the relevant financial year in which such expenses were incurred, then he will not be able to claim deduction for these expenses. However, the assessee is given time to pay these amounts before he files his return of income or the due date for filing his return of income whichever is earlier. The assessee can show the proof of making such payment and claim the deduction in the same year (in which the amount was accrued).

It is worth noting that if the liability to pay the specified sum pre-existed on the first day of the previous year, (i.e. outstanding liabilities) deduction will be allowed only if the payment is made on or before the end of the previous year. In other words, the due date for filing the return deadline applies to the sums for which the liability was incurred during the previous year and not to pre-existing liabilities.

Specified Expenses under Section 43B:

1. Tax, Duty, Cess or Fee under Any Law:

Any sum payable by the assessee by way of tax, duty, cess, or fee, by whatever name called, under GST, Income Tax, Customs Duty or any law for the time being in force.

2. Contribution to any Recognized Employee’s Benefit Fund:

Any sum is payable by the assessee as an employer by way of contribution to any employee’s benefit fund namely PF fund, superannuation fund, gratuity fund or any other fund, by whatever name called, for the welfare of the employees.

3. Bonus or Commission to Employees:

• Any sum is payable to employees as a bonus or commission against the services the employees provide during the financial year.
• This amount should be the actual bonus / commission payable to employees and not dividends payable to them as shareholders.
• Moreover, there must be an employer and employee relationship. Any payment of commission under an agent and a principal relationship does not form part of Section 43B.

4. Interest on borrowings from Public Financial Institutions:

Any sum is payable by the assessee by way of interest on a loan or any borrowings taken from any public financial institution or a State financial corporation or a State Industrial Investment corporation.

5. Interest on Loan taken from a Bank:

• Any sum is payable by the assessee by way of interest on loan or advances or any borrowings taken from a scheduled bank.
• ‘Bank’ includes scheduled bank, a co-operative bank or a primary co-operative agricultural and rural development bank. However, a primary agricultural credit society is not included.

6. Payment of Leave Encashment:

Sum payable by the assessee as an employer to his employees by way of leave encashment are covered under this section.

7. Payment to Indian Railways:

Any sum payable for the use of railway assets to the Indian Railways.

Exception:

• Assessee keeps books of accounts on mercantile basis.
• Payment in respect of aforesaid expenses is actually made on or before the due date of submission of return of income under sec 139(1)
• The evidence of such payment is submitted along with return of income.

Note: However no annexure is possible with the new ITR forms. Such evidence should be maintained by the assessee and produced to Assessing officer as and when needed.